Investments

Question 1

Investing:

SAA (Long term AA)

Strategic asset allocation (sometimes referred to as SAA) is a type of asset allocation model used to achieve the investor’s long-term investment goals. This is achieved by allocating different percentages of the investment into different asset classes within the portfolio. Asset classes include cash, bonds, shares etc.

Answer 1

TAA (short term tactic)
Tactical asset allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors.

Eg, extra 5% in property, less 5% cash

Question 2

Tax on investments:

Managed funds

Most Australian managed funds are taxed on a flow-through basis, which means they do not pay income tax themselves because they distribute all the income earned in any one year to investors. As a result, the taxation liability rests with the investor and is paid at the investor’s marginal rate of tax.

Answer 2

EG. Fund has a total return of 20% with 15% being income.

15% goes to income of tax payer, paid at MTR.
5% is capital gain (CGT doesn’t apply until investment is sold)

Income can be from - cap gains of the fund manager, dividends from the stock held by the manager and also any realised capital gains (less losses and/or CGT discounts)

Question 3

Franking credits:

To avoid taxing company profits twice, tax must be paid at either the company or individual level, but not both.
If it were paid only at a company level, high income people would benefit from the 30% tax rate.
So our system taxes company profits at the individual’s level.
Any tax already paid by the company is refunded.

Answer 3

Shareholders pay tax on franked dividends at their personal marginal tax rates and receive a credit for the tax on profits paid by the company.

When shareholders complete their tax returns, they add the $70 of dividend to the $30 of franking to declare the $100 of taxable income. The $100 of company profit is therefore subject to tax.

Shareholders pay tax on the $100 at their marginal tax rate and claim the $30 that was already paid by the company as a tax credit.

If the shareholder’s marginal tax rate is 45%, the tax is $45 but $30 is a tax credit and the shareholder pays the extra $15 to the ATO.

If the shareholder’s marginal tax rate is 0% (for example, someone with income below the tax-free threshold of $18,200 or an SMSF in pension mode), the tax is $0 and the $30 is refunded to the shareholder (in the current system).